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Talking base stocks with ExxonMobil

Exploring the key drivers for change in an increasingly complex market

The global base stock market is currently significantly challenged in terms of near term profitability and longer term investment to support growth. At this year’s ICIS World Base Oils and Lubricants conference in London*, David Parsons and Tim Nadasdi from ExxonMobil Basestocks and Specialties, took time to answer our questions on the changes and challenges they see ahead in such a complex market.

The base stocks market is currently in a period of some imbalance in terms of supply and demand. This has significant implications for not only near term profitability but also future investment to support growth and long term viability. David Parsons, Global Sales Manager at ExxonMobil Basestocks and Specialties, explains the market conditions that have led to the current capacity overhang.

“Several of the markets that had aspirations or expectations of significant growth have really not come forward in that fashion,” he confirms. “I think, particularly in China, the growth curve has been well short of what was expected, while some of the mature markets, which were expected to be relatively flat, are in decline. At this time of low demand, exacerbated by the effects of COVID-19, there is little question that there is significant overhang in terms of capacity as compared to demand.”

David Parsons from ExxonMobil Basestocks and Specialties

If you go back 2019 timeframe this past year, the estimate was about 50,000 barrels a day of excess capacity. And by our estimates, these have been publicly shared, we expect it could grow to 100,000 barrels a day by 2023. Now, that does presume very little rationalization and very modest demand growth and that well could change.

This excess capacity means it is currently very much a buyer’s market and base oil purchasers, along with the marketers and blenders of finished oils, have a wide array of options. While this brings flexibility, Tim Nadasdi, Technical Advisor at ExxonMobil Basestocks and Specialties, suggests that it also increases complexity.

Tim Nadasdi from ExxonMobil Basestocks and Specialties

The world is getting more complex, especially for finished lubes blenders who are going to, need a multitude of base stock and component options to be able to supply the breadth of applications that they want to sell into. So, they're going to need partners with them that actually have that capability of helping them simplify that complexity, by offering a breadth of types of technologies that they're going to need into the future.

But, despite the supply demand imbalance and perhaps because of this increased complexity, David sees a need for continued investment.

Tim Nadasdi and David Parsons from ExxonMobil Basestocks and Specialties

Some people question why in this very difficult environment are we investing. It's really all about customers and making sure we have the right product at the right time and the right place for the customers so we can help them grow their businesses in the future.

This business runs in long cycles and again, we're in a fairly challenging one currently. But if you look across to multiple timeframes, decades if you will, this is the type of planning that's required to be well aligned with your customer base, particularly where their growth is intended to occur. And in the case of new products, whether quality demands may move towards

It's still clear to us that Asia is a very important market as you look around the world. There will be substantial growth even though it's been less than perhaps expected here of late. And accordingly, we're planning our next investment for the Singapore complex and we hope to stream that in the 2023 timeframe.

Group I commitment

Looking across the base stock groups, driven by the varying performance requirements of lubricants for passenger cars, commercial transportation and industrial applications, the demand balance for the different products is changing. Tim and David give us their views on the situation for Group I, and the importance of co-product streams.

Tim Nadasdi and David Parsons from ExxonMobil Basestocks and Specialties

There are applications where Group I is either preferred or even required. I think those applications will continue well into the future. If you look at the automotive space, that's about 40% of the overall base oil volume. The 60% is the industrial marine and everything else. I think Group I has a big place to play in that other part. We think we can be a good supplier in those markets, and we think our assets are well positioned both geographically and with the right technology to be able to maximize the molecules and the value of the molecules coming through our refineries.

Not only do you have the base stocks which are technically fit for purpose for certain applications that require viscosity or solvency, but you have the co-products.

I think as we look to the future with let's say a successful Group I provider, it will be important to have a well integrated site with world scale so you have the efficiencies of size and scope. I think you'll need to be really partnered with chemical plant and other processing so you can let's say address the co-product streams that don't have good use or may have content that needs to be destroyed or repurposed.

And then finally, you need the ability to make and merchant the valuable co-products. Examples would include wax, process oils and extracts. Another example would be engineered woods, so the construction board typically in the walls of many homes. And then finally, flexible packaging whether it's around foodstuffs or other materials. All of these are part and parcel to rising standard of living and paraffin waxes are one of the ways to manufacture them, along with other alternatives but still that tends to be a fairly preferred product.

My point in sharing that is that if a producer can effectively provide the base oils and still have technical merit in the marketplace, and can provide the co-products that have a value profile in benefiting use, and can do so efficiently because it does require I think scale and a high complexity site in order to manage all the co-streams. Particularly now with IMO 2020. Then we believe that the confluence of those conditions is a viable path forward.

Impact of IMO 2020

As David just touched on, the IMO 2020 low sulphur regulation for fuel oil used onboard ships is one of the latest events to influence product stream decisions at the refinery. Tim picks up this topic and describes the impact that its introduction may have on base stock producers.

“IMO 2020 is a significant event in our industry and has been probably the biggest impact on the base stock business since the advent of hydro-cracking. Its introduction will make it more difficult for Group I producers who don't have that capacity for resid conversion and hydrotreating and, in an environment where high sulphur products are less valued, I think they're going to find it difficult to be competitive. It is not clear yet how ship owners will operate in this new norm. Although we expect the majority will move to low sulphur fuels, we see that being dynamic going forward and I think we can expect to see a multi fuel future in the marine industry as shippers look for the best way to meet the regulation.”

Tim Nadasdi from ExxonMobil Basestocks and Specialties

We believe that the larger amount of builders are going to make the choice to go to low sulphur fuels, and that is what is going to cause a ripple effect in the base oil business because in that type of environment the pricing mechanisms, it's going to value low sulphur products and co-products and devalue high sulphur fuels and lubricants and other co-products. Refineries that don't have the capability of dealing with sulphur components effectively are going to struggle economically.

There's no really good economic choices for somebody who doesn't have the capabilities of refining the high sulphur crudes and producing low sulphur types of... either fuels and other co-products today. The impact on the industry is going to be significant. A lot of people who produce Group I today are going to find it challenging if again they don't have that molecule deconstruction and hydrodesulphurization capabilities and capacities. That's part of what's going to help drive I think the rationalization of the base stock market

Future demand drivers

In the latest edition of the ExxonMobil World Energy Outlook world population is forecast to exceed 9 billion and GDP is expected to roughly double by 2040. Over the same period the report expects energy consumption to grow by some 20% and, although that is significant, it really represents the world doing more with less.

One of the routes to improve energy efficiency in automotive applications is a move to lower viscosity lubricants.

David explains how this trend to low SAE 0W-x viscosities is impacting the demand for high quality base stocks.

“In my view, achieving consumer expectations and OEM requirements for better durability, longer life and fuel efficiency in parallel is not easy and raises the demands put on all of the components - including the base stocks. Aspects including oxidation resistance, thermo stability and better volatility are increasingly important as we move to lower and lower viscosity oils to achieve the fuel efficiency that is targeted in these applications. There will be an increasing appetite for higher saturates, higher performing, hydro-cracked base stocks that can achieve the performance characteristics in these lower viscosity profiles.”

“But,” Tim explains, “as customers look for opportunities to achieve performance, in both affordable and effective ways suppliers are increasingly thinking of base stocks less in discrete categories. We see it more in the context of a continuum of quality, performance and even molecular makeup. Many of the molecules that you have in a Group III are the same molecules you have in a very high quality Group II and so it's not really as distinct as the API categories that have been defined. I think there are a number of different base stock options available for blending these low viscosity engine oils.”

Tim Nadasdi and David Parsons from ExxonMobil Basestocks and Specialties

As much as Group III has a place and Group III plus has a place in the market, it's not the only option there. That's part of why Group II is heart of the market these days. It actually has the wider viscosity capabilities of doing some industrial applications, plus the automotive space. The point is that there's more than just Group III that can fill that void and that need for the low viscosity engine oils. Going forward, we see again Group II continuing to play a big role in that space as well.

I think it's fair to suggest that the entire array of base stock options as component possibilities is important, and the OEM requirements will cause that to continue to shift. But I think it's also important to understand where heart of market is. And I think to Tim's point in that regard, we think Group II and II plus, along with Group III, where required depending on the viscosity profile and the performance attributes, will all be thoroughly in play as we look forward.

Other avenues to efficiency

Another key avenue being explored by OEMs, as they look for fleet-wide fuel economy gains, is powertrain electrification. The passenger car segment is taking the lead here but, as Tim and David discuss, it is currently unclear to what extent this trend will influence the base stocks market of the future.

Tim Nadasdi and David Parsons from ExxonMobil Basestocks and Specialties

So the expectation is the energy efficiency is going to improve by about 2% per year going forward. That's a big reduction in overall energy use, even though the demands, the number of people going places both commercially transport of products and people, and individual is going to increase. And a lot of what's going to help the world manage that is going to be new technology that increases energy efficiency, decreases energy use.

On the EV side, EVs are expected to continue to grow into the future, surpassing 20% of the car park by about 2040 and be about 30% of the actual new car purchases by that point in time. EVs being the plug in hybrid, the full EVs as well as fuel cell type of vehicles and technologies.

I think again, governments have a hand in it in terms of supportive policy or prohibitive policy for older technologies as well as where the consumers go. I think if we were to be candid, electrification is coming more slowly than had been predicted, but there's also a thought that it may accelerate at some point in the future more rapidly than it has previously. All of these are estimates and foresight as best we know them. But I think we are keenly convinced it's going to have a big impact on our future as far as energy consumption, and importantly the lubricants trade.

Future opportunities

While electrification may impact future lubricant consumption in the passenger car segment, Tim and David see significant opportunities for growth. In the commercial sector for example, an increase in the products and people being moved by ships, planes, trains, buses and trucks is expected to drive growth, presenting a real opportunity for base stock and finished lube suppliers.

Tim Nadasdi and David Parsons from ExxonMobil Basestocks and Specialties

We've talked about increasing energy demand and things, but a big shift here is in the transportation sector where you're seeing a significant increase in energy needs and transportation. That's both personal mobility and commercial mobility. That space is expected to grow about 25% in the next 20 or so years. So that creates a lot of opportunity, especially on the commercial space, in terms of for suppliers to make sure that they have the right fit for purpose products to support that kind of growth.

But that converse opportunity with the commercial vehicles is really an area of future focus I think for many of the lube marketers as it grows in increasing importance. And bringing that back now to base stocks, in today's world we see Group II as the workhorse. In the recent timeframe, it's become the single largest category of Group I through V usage and by 2040, we expect that it will reach more than half.

With demand uncertainty and increased complexity both influencing the future base stocks market, the opportunities for growth are encouraging and David concludes by explaining some of the initiatives ExxonMobil has put in place.

“The Rotterdam hydrocracker that came online in early 2019 brought roughly 20,000 barrels a day of high quality base stocks to Europe, really enabling them to transition to Group II and significantly reducing the need for imports. Our next investment in Singapore, which is scheduled to stream in 2023, will bring an additional 20,000 barrels a day of Group II capacity to the important Asian market. These investments will help us to ensure we are ready to respond to changing market dynamics and can efficiently meet the needs of our customers.”